Profiles of journeys in investing lives and lessons from playing Robert Kiyosaki's Cashflow games. Strategies and tips for playing the game, both on your game financial statement and your real one. Check out the Twin Cities Rich Dads and Moms Cashflow Club in Northern Worcester County, MA. Please consider connecting with me on Linkedin.

Facebook

Monday, April 30, 2007

Because of James' house rule for Cashflow 101 and Cashflow 202 of drawing two occupation cards and picking the one you want, I assumed I'd get at least one mid to high income card.

Silly me.

I drew the mechanic and the janitor. These are the two lowest income cards. I went for the mechanic because of the slightly higher cash flow.

There were 6 of us at the table. James played a strategy Debbie and I called wimpy aggressive. Debbie played a very aggressive strategy. I played the strategy that I was calling aggressive (but don't any longer), except financing the small deals the way the airline pilot was financing the big deals.

3 of us got out of the Rat Race (James, Dan and myself). I can't go into too much detail because it's already becoming kind of fuzzy. 4 hours into the game, the mechanic had bank loans of $18K, a house, 5000 shares of MYT4U at $1 (just bought on a loan) and 300 shares of OK4U at $5. The player immediately after me (James)drew MYT4U for $10 per share immediately after I bought it for $5. Normally, I'd pass on selling at $10 except that this let me pay off my bank loan in full and and put me at $1600+ positive cashflow from just over $1K negative. Then I sold stock at 40 for the other (very lucky indeed).

Now, at James', you can buy and sell subject to. He wanted to pay down his bank loan sufficiently by getting the $35K he had into 4 properties (a 4 plex, 2 houses and a condo) and I had the cash. Didn't tell him until afterwards that the cash perflow from these properties would put me out. Of course, it put him out too! That's a win-win if I every heard of one.

James was the nurse and if you can believe it, had passive income of $11K. Yes, $11K. Mine was a measly $1960 but I was out. Dan already was.

Think you can't buy a portfolio of properties from a single investor? Think again. Sometimes they are retiring, sometimes they want to put money into something else, sometimes they are getting divorced. It happens. I know some investors that have unloaded before and I know some who have bought.

So I had another masterbatory Cashflow experience. I admit I've done it in the privacy of my own home. What is it you say? Playing Cashflow the board game by myself and playing more than one occupation. It's easier in some ways to play multiple chess games at once.

Some back story: I didn't want to wait too long to play again and not having Cashflow the E-game, I played alone.

This is tough enough. And for the first hour, I was on the phone with Danielle which wasn't too fair to her either (Sorry!). Not too fair for myself because it's not easy playing two parts.

I chose the occupations: the airline pilot (like before) and the janitor. I thought I would play the janitor as a small time version of the risky strategy I was playing with the airline pilot. It was a little too tough to juggle until later in the game. So you won't see anything more about the janitor in this post.

This time I watched the clock and I counted turns. Aside from yaking on the phone, I was pretty intent on the learning experience.

So once again, as the airline pilot, I started out right away with big deals. That means borrowing the down payment and borrowing to float yourself month-to-month. This time it was the 12 unit apartment building. I continued to buy and borrow, at one point having a bank loan of about $180,000. Briefly I dropped into the small deal category and bought 5000 shares of MYT4U at a buck per (one a bank loan) and was lucky enough to unload for 40. Which paid of that bank loan which put me into substantial positive cash flow.

One of the house rules here when playing Cashflow 101 here or Cashflow 202 is to follow the optional bankruptcy rule strictly. That means if you need a loan, make sure you do it before your pass Pay Check or land on Downsized and get laid off if you have negative cash flow. So calculate it ahead of time and borrow the money. So that meant a lot of figuring before the turn.

Which the pilot, at 1-1/2 hours, I had substantial negative cash (I don't remember what) but I was willing to pay the outrageous rates the game imposed (10% APM interest only and the M is not a typo). And then MYT4U came up at $40 per share. All of a sudden I had about $10K positive cash flow (about an $14K swing monthly) and in an instant, I was out of the rat race if I wanted. But I decided to go for passive income being 2x total expenses and then 3x. By the time 3-1/2 hours went by, I had $14,120 in passive income as the airline pilot, $55K in cash, had no credit card or retail debt. I even paid cash for the boat! I had even paid off the car when I was going to quit at passive income equaling total expenses.

When I stopped, I had amassed a portfolio including:

2 houses

1 duplex

4 four plexes

1 eight plex

1 12 unit apartment building

1 shopping center

20 acres of land on spec

3 limited partnerships

With just 2 people, you don't see a lot of market cards so there wasn't much hope of selling to a buyer with big pockets, like $135K for a $45K house so you can move on to big deals. That largely meant buy and hold. That's okay.

So, what did I learn from all of this? If I'm playing a game, and you know what cards have been drawn (stocks), it's easy to hit it big with stocks like I did. In the real world, that's unlikely. However, this is a strategy that does work; it needs more analysis as well as strong risk tolerance. And well developed credit lines.

Upon self-reflection, I realized that I had already modeled this behavior in the real world. Last year! I bought a couple of different properties near Boston last year for no money down. That's tougher to do now but it can still be done a variety of ways that I won't discuss here. But modeling a behavior in the game that I had already done somehow seems riskier than when I did it in life.

Those not familiar with the game should know that it's simplified, was created more than a few years ago and the numbers seem small, especially if you live near Boston like I do.

So what. It's the concepts that matter. Not the number of zeros in front of the decimal point.

Because of the experience of some folks that attended a 3-day Rich Dad "Learn to be Rich" seminar, I decided to roleplay based on the description of some of their experiences. Since I played a lot differently then I normally do, I wanted to share with everyone the experience. I really think I learned a lot from it. And I hope discussing it helps other people too to learn and step out of their comfort zones.

I drew the airline pilot. This is one of the high income and high expense occupations that essentially spend everything and lives paycheck to paycheck. Despite having a monthly cashflow of about $2600 (that's after all taxes and expenses folks), this occupation starts the game with only $400 in savings!

So I decided at the start of the game because of how one of our members (Michael) described some of the play from the "Learn to be Rich" seminar in Peabody, that I was going to play aggressively and he opted to do the same thing. Unfortunately I don't remember enough of his details to comment there. Only occasionally, did I back off and go for small deals and I frequently bought deals that other players felt they couldn't get into.

And you know what? I immediately did a huge deal on my first turn, buying a 24 unit apartment building. This property required $50K down but had a monthly cash from of $2800. Because of the high cash flow of the property and the high cash flow for the occupation, I still had $400 cash flow monthly after buying it and financing the whole down payment (bank loans in the game are essentially 10% hard money, interest only). My initial knee-jerk reaction was "no way, I can't do this". But then I worked the numbers. I'd be very tight at $400 per month after all expenses, but I would pay that bank loan down after all over time, even if I could only knock $1K off every few paychecks. Because each time I did that, my monthly cash flow would increase by $100.

Then I continued to buy and buy and buy. I continued to structure deals the same way. I had about $120,000 in bank loans as well as mortgages, a couple of businesses, some speculative investments (krugerands) bought at a deep discount, 1000 shares of MYT4U stock I bought at $5 (normal trading range $5-30 and just over $3K per month negative cash flow. And I still had about $17K in cash. When the game was called, I looked at the market cards as well as small deal cards. Before another turn around the board, I'd have been back to about $3K positive cash flow because of a plex buyer at $40K / unit and I'd have been able to sell my shares of stock at $40 per unit. Even after losing the cash flow from the 2 duplexes.

So at this point, I would have had the resources to pay down the expenses I had, primarily bank loans, monthly. Following no other strategy at this point of the game except paying expenses, would have put me out of the Rat Race in 40 turns, assuming not being laid off.

Admittedly, that's a long time but it's illustrative. For example, I probably would have had about $20K cash after the turn around the board and the $3K positive cash flow. Then with that positive $3K cash flow, pay down $1K in the bank loan and pocket $2K (pay yourself first, remember?). Assuming 1 paycheck every 2 turns average(it's less than that actually because paychecks are 8 spaces apart), in 40 turns with no other deals and $20K fewer bank loans, monthly cash flow would have been roughly $5K because $20K fewer in bank loans results in an positive cash flow increase of $2K. All the while how holding $60K cash and now only $80K in bank loans.

Fast forward another 40 turns and I'd have $7K cash flow per paycheck, $100K cash and only $60K in bank loans. Assuming a payoff of the loans with the cash, results in cash flow increase of $6K and a new total that in all likelihood would exceed monthly expenses or be awful close. That additional $40K could pay the car and any remaining credit card debt putting me out of the Rat Race.

Would I have stopped doing deals and shifted to the conservative debt payoff strategy? No, but it works in this scenario. And continuing to do deals would have put me out faster than 80 additional turns.

In Cashflow games, the higher income occupations tend to be harder to get out with then the middle and lower income cards because of the expenses. I think I just found the key to getting the higher income cards out: you've got greater resources (cash flow) so use it instead of just letting it eat away. Because it will get eaten away.

It was really illuminating to step (way way) out of my comfort zone. So maybe next time trystepping out of yours or modeling some investing behavior that you don't normally exhibit in real life.

I've never had a blog before but I'll try now. I'm looking to post relevant lessons from playing Cashflow 101 and Cashflow 202 including in-game experiences and how this translates or how I or you have translated this into the real world of money, real estate, business and investing. Tips and techniques are good too. So this can be an introduction to escaping the Rat Race.